Answer to Question #200562 in Microeconomics for aman

Question

Most of the cost of a flat screen TV involves the LCD panel.Globally, 220 million flat screen TVs were sold in 2011 for $115 billion. Although scale economies in massive factories and volume discounts on electronic input components have driven the cost of LCDs down from $2,400 to $500 the last decade, the price has fallen even faster. In 2001, the average selling price of a large LCD panel was over$4,000. By 2011, this price had fallen below $600.Sony Corporation finds its flat screen TVs now fail to cover the full cost of the LCD panels and instead impose a $126 ($500 - $374) loss perTVsold.Nevertheless, the indirect fixed costs of the LCD factories including Korean Samsung, Japanese Sharp, Panasonic, and Sony constructed are partially covered by continuing its operation (continueproduction). Losses would be greater in the short run if they shut down. As an economic consultant, what would you advise Sony Corporation to do in light of the competition from the other manufacturers?(10marks )

Answer 1

When production technology improves, the supply of finished products rises, causing the supply curve to shift to the right, the quantity supplied to rise, and the equilibrium price of a product to fall. As a result, as production costs decline, prices decline as well, and the greater the increase in supply, the lower the price will be.

Sony Corporation should continue to produce if it is losing money and can meet its variable (direct) costs.However, if it is unable to cover even its fixed (indirect) costs, it should cease operations.